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Restarting Growth in sub-Saharan Africa

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  • Restarting Growth in sub-Saharan Africa

Abebe Aemro Selassie, in this article, identified the challenges bedevilling sub-Saharan Africa, positing that strong domestic policy measures are urgently needed to restart the engine of growth

 Economic growth in sub-Saharan Africa has slowed markedly. After close to two decades of rapid expansion, 2016 saw the lowest level of growth in more than 20 years, with regional growth dipping to 1.4 percent. The loss in momentum was broad based, with activity slowing in almost two-thirds of the countries (accounting for more than four fifths of regional GDP). The main sources of encouragement are the sizable number of countries in Eastern and Western Africa where growth remains robust, albeit slower than in recent years.

And looking ahead, the outlook looks set to remain subdued. The modest recovery projected in 2017—to 2.6 percent—will barely put sub-Saharan Africa back on a path of rising per capita gains. Furthermore, the uptick will be largely driven by one-off factors in the three largest countries—a recovery in oil production in Nigeria, higher public spending in Angola, and a reduced drag from the drought in South Africa. The outlook is shrouded in substantial uncertainties: a faster than expected normalization of monetary policy in the U.S. could imply further appreciation of the U.S. dollar and a tightening of financing conditions; and a broad shift towards inward-looking policies at the global level would further hamper growth in the region. Domestic threats to a stronger economic recovery in some countries include civil conflict and the attendant dislocations like famine that they can trigger—as in South Sudan at the moment.

 Insufficient policy adjustment

The fall in commodity prices from their 2010-2013 peaks was a very substantial shock. But, three years after the slump many resource-intensive countries have yet to put in place a comprehensive set of policies to address the impact of the decline in prices. Countries which have been hardest hit by the decline, especially oil exporters such as Angola, Nigeria, and the countries of the Central African Economic and Monetary Union (CEMAC), are continuing to face budgetary revenue losses and balance of payments pressures. The delay in implementing much-needed adjustment policies is creating uncertainty, holding back investment, and risks generating even deeper difficulties in the future.

It is also concerning that vulnerabilities are emerging in many countries without significant commodity exports. While these countries have generally maintained high growth rates, their fiscal deficits have been high for a number of years, as their governments rightly sought to address social and infrastructure gaps. But now, public debt and borrowing costs are on the rise.

Against this background, the external environment is expected to provide only limited support. Improvements in commodity prices will provide some breathing space, but will not be enough to address existing imbalances among resource-intensive countries. In particular, oil prices are expected to stay far below their 2013 peaks. Likewise, external financing costs have declined from their peaks reached about a year ago, but they remain higher than for emerging and frontier market economies elsewhere in the world.

Strong policies are needed to restart the growth engine

In view of these challenges, what can be done to restart growth where it has faltered and preserve the existing momentum elsewhere? We see three priority areas:

First, a renewed focus on macroeconomic stability is a key prerequisite to realize the tremendous growth potential in the region. For the hardest-hit resource-intensive countries, strong fiscal consolidation is required, with an emphasis on revenue mobilization. This is needed to swiftly halt the decline in international reserves and offset permanent revenue losses, especially in the CEMAC. Where available, greater exchange rate flexibility and the elimination of exchange restrictions will be important to absorb part of the shock. For countries where growth is still strong, action is needed to address emerging vulnerabilities from a position of strength. Now is the time to shift the fiscal stance toward gradual fiscal consolidation to safeguard debt sustainability. Greater revenue mobilization offers the best route to maintain fiscal space for much needed development spending.

The second priority is to implement structural reforms to support macroeconomic rebalancing. On the structural fiscal front, the focus should be to improve domestic revenue mobilization and reduce the overreliance on commodity-related revenue and debt financing. Financial supervision needs to be strengthened, especially that of pan-African banks through enhanced cross-border collaboration. More broadly, greater emphasis is needed to support the economic diversification agenda starting with policies to address longstanding weaknesses in the business climate. This will help to attract investment towards new sectors and unleash the large and still untapped potential for private sector-led growth.

Finally, policies to strengthen social protection for the most vulnerable are essential. The current environment of low growth and widening macroeconomic imbalances risks reversing the decline in poverty. Existing social protection programs are often fragmented, not well-targeted, and typically cover only a small share of the population. There is a need to better target these programs and use savings from regressive expenditures such as fuel subsidies to ensure that the burden of adjustment does not fall on the most vulnerable.

While the growth momentum has undoubtedly slowed, medium-term growth prospects in sub-Saharan Africa remain bright. To fulfill the aspiration for higher living standards, strong and sound domestic policy measures are urgently needed to restart the growth engine.

  • Abebe Aemro Selassie, is Director, African Department, International Monetary Fund

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

New COVID Variant: Brent Crude Sheds Over $10 to $72 Per Barrel

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Brent crude oil extended decline by over $10 on Friday on concerns that a new COVID variant called B.1.1.529 could force economies to impose restrictions and slow down global demand.

Brent crude, against which Nigerian crude oil is measured, dropped from $82.55 per barrel it attained on Thursday to as low as $72.09 on Friday at 7:20 pm Nigerian time before it rebounded slightly to $72.98 per barrel as shown below.

Global financial markets plunged across the board following reports that two cases of the new heavily mutated COVID variant from South Africa have been reported in Hong Kong and that the United Kingdom, one of the most affected nations during COVID-19 with over 140,000 deaths has halted flights from six South African nations to prevent a potential breakout of the new COVID variant.

Experts are concerned that the new variant outbreak would slow down global growth and increase global risks going into the new year.

According to Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA, “Even without severe restrictions, people will adopt more caution which will weigh on demand, as OPEC+ has repeatedly stated and factored into their models.”

However, heavy crude oil-consuming nations like the United States, China and others that have been calling for more supply will now enjoy substantial price reduction if this continues, therefore, Joe Biden may not need to release millions of barrels into the global market.

“Crude is back at levels last seen at the start of October and if this risk aversion continues in the weeks ahead, there’s plenty of room to fall. While OPEC+ would likely have avoided altering production plans next week or in the months following in response to the SPR releases, it may soon feel its hand is being forced. Next week may come too soon but another major outbreak could see them slam on the brakes,” Craig Erlam added.

 

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Markets

Flight to Safety as Variant Fears Soar

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Risk assets are getting pummelled at the end of the week as a new Covid variant sparks fears of new restrictions and lockdowns.

The most worrying thing about the new strain at the moment is how little we know about it, with early indications being that it could be more problematic than delta. The biggest fear is that it will be resistant to vaccines and be a massive setback for countries that have reaped the benefits from their rollouts.

We’ll no doubt learn more in the days and weeks ahead but for now, fear of the unknown will weigh heavily going into the weekend and could carry over into next week. We’re seeing a typical flight to safety in the markets with equities, commodity currencies and oil getting whacked and traditional safe havens like bonds, gold, the yen and swissy getting plenty of love.

In times like this, we get a true sense of what investors consider to be real, reliable safe-havens. And bitcoin is off 8% today which has delivered a fatal blow to its safe-haven credentials, putting an end to another crypto myth that has surfaced over the years despite there being zero evidence to back it up. Maybe one day investors will have a different opinion but right now, when their cash is at stake, they’re sticking with safe-haven assets with a track record, as they should.

Pfizer has sought to calm nerves, stating that should a vaccine-escape variant emerge, it could produce a tailor-made vaccine in about 100 days. Three months can feel like a long time but when compared to where we were 18 months ago, that is very reassuring as a worst-case. It may not be quick enough to prevent more restrictions this winter though.

Erdogan standing firm on interest rates

Turkish President Erdogan is successfully talking down the lira once again, claiming there’s no turning back from the new economy program and that interest rates will decline. It’s incredible to see a President have such disregard for something that will have such a huge impact on so many people. It’s like he’s playing with the markets to see what he can get away with. In a sign of Erdoganomics fatigue, the currency has quickly recouped the more than 2% losses it incurred immediately following the comments. A sign that these antics are now expected and priced in, it seems.

Oil slides on variant concerns

Oil is among the assets taking a heavy beating on the variant news today, falling more than 5% as traders fret about the impact on restrictions and behaviour this winter. Even without severe restrictions, people will adopt more caution which will weigh on demand, as OPEC+ has repeatedly stated and factored into their models.

It seems the US and other consuming countries have played their hand too soon. Sure, Biden will score some political points ahead of the midterms as voters see prices at the pump fall, which was ultimately the goal. But should prices spike again early next year, what then?

Crude is back at levels last seen at the start of October and if this risk aversion continues in the weeks ahead, there’s plenty of room to fall. While OPEC+ would likely have avoided altering production plans next week or in the months following in response to the SPR releases, it may soon feel its hand is being forced. Next week may come too soon but another major outbreak could see them slam on the brakes.

Gold jumps on safe-haven appeal

Times like this are when gold shines and we’re seeing investors flock back to an old reliable friend today. It has pulled a little off its highs after hitting $1,815 earlier in the session but it remains above $1,800 at the time of writing. It’s an interesting one for gold and bonds, as the situation now is very different from last year.

Central banks can’t just turn on the taps again with a “whatever it takes” avalanche of cheap cash as they have before. Inflation is a real problem and lockdowns will exacerbate the problem. Sure, they may be a little more patient and hold off on raising rates next month in the case of some or accelerating tapering in the case of the Fed, but they can hardly ramp up their stimulus measures in any considerable way. Their hands are tied.

This should still be bullish for gold as, at the very least, central banks will delay tightening until they have a better idea of the risks to the economy. Allowing inflation to run hot unaddressed could increase the hedge appeal of gold again, particularly in these uncertain times.

Bitcoin remains a speculative risk asset, for now

In recent weeks we’ve seen that, in times of real uncertainty, bitcoin has not done well as an inflation hedge or a safe haven asset. There’s no doubt it’s a fascinating tradable instrument and a highly speculative one, but it’s quite clear now that it’s a risk asset and nothing more. Not at the moment anyway. Who knows what the future holds.

It’s taking a real beating today, off around 8% and looking vulnerable. Key support around $55,500 has fallen which will now draw attention back to $50,000. I’m sure soon enough the eternal crypto bulls will pile back in and smell a bargain but as we’ve seen so often in the past, bitcoin is capable of enormous gains and eye-watering corrections.

If this new variant triggers major risk aversion in the markets, it could come under serious pressure. Unless of course, the inflation narrative catches again. No sign of it yet but, as ever with crypto, it has an incredible ability to find the bullish case in anything. Maybe this will be next.

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Markets

Markets to Wobble Then Shrug-off New Covid Variant

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The new Covid-19 variant will temporarily wobble financial markets, but concerns will be quickly shrugged off by them, predicts the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The prediction from deVere Group’s Nigel Green comes as a new Covid-19 strain discovered in southern Africa weighed on global markets on Thursday.  Travel stocks, hospitality firms, and bank stocks were amongst the hardest hit.

The World Health Organization will meet on Friday to analyse the new variant. The meeting will determine if the B.1.1.529 strain should be designated a variant of “interest” or of “concern.” The variant, which was identified on Tuesday, is said to carry an “extremely high number” of mutations.

On Friday, Asia Pacific markets were down around 2%, European stock futures predict a more than 2% drop at opening trades. Meanwhile, U.S. stock futures are also set to open lower, trading only until 1p.m. after Thursday’s Thanksgiving holiday.

Mr Green says: “Experts are determining whether the new variant is more transmissible or more deadly than previous ones.

“The fact that a new strain has been discovered and, critically, that at this stage we know little about it has caused jitters in the financial markets, which loathe uncertainty. The headlines have caused a knee-jerk reaction.

“In addition, Wall Street was closed yesterday meaning that a large bulk of global trades were missing, making other moves more pronounced.”

He continues: “This wobble is likely to be temporary with markets remaining bullish for the time being.

“Global shares have jumped 16% this year with investors focusing on the post-pandemic economic rebound. They largely shrugged off the Delta variant that caused a mini wave of market nerves in the summer.”

He goes on to add: “It’s likely that markets will do the same with this new variant.

“This is because, as Delta showed, mutations are now expected and we have more of a blueprint about how to deal with them.

“Instead, global financial markets will be focusing on other pressing issues including high inflation caused by supply side bottle necks and the likelihood of a quicker pull away from ultra-loose monetary environment.”

The deVere CEO concludes: “Markets will temporarily wobble on the uncertainty of this new Covid variant, but will remain bullish and largely focused on other issues.”

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